Shifting to a Two-Speed Economy

I was disappointed by last week's jobs report. I had hoped that the increase in job openings reported by the Bureau of Labor Statistics in JOLTS (Job Openings and Labor Turnover Survey) would have been filled. But that has not been the case. On the last business day of September there were 225,000 more job openings than at that same point in August. But in November, only 120,000 jobs were created. Why were so many jobs left unfilled?

The Federal Reserve is very interested in answering this question because it can help determine effective monetary policy. Several district banks have recently published research on this topic, including two by the Chicago Fed, which you can access here and here, as well as a St. Louis Fed research report and the New York Fed's research. And these are just a few.

The naïve approach is to say that the unemployed simply don't have the skills employers want, or workers don't live where employers are. That is true to an extent, but it doesn't explain the whole story. The New York Fed's research demonstrates that, of the roughly five-percentage-point increase in the unemployment rate since the beginning of the recession through the peak in unemployment, skills mismatches accounted for only 0.6 to 1.7 percentage points of the increase in the unemployment rate. (Geographical mismatches did not increase the unemployment rate by much, perhaps given the propensity of the unemployed to default on mortgages in order to move.) The Chicago Fed's research generally concurs.

This skills mismatch is largely concentrated in more-educated workers. The unemployment rate for those with a college degree is just 4.4% while it is 8.8% for those with just a high school diploma and 13.2% for adults over age 25 who have not graduated high school. Highly educated workers are often highly specialized, and a job opening requiring a narrow but deep expertise in a certain field cannot easily be filled by just any person in the same field, let alone one who specializes in a different area. (A psychiatrist is not a cardiologist, though both are doctors.) Lack of demand is likely the culprit behind higher unemployment for lower-income workers, though more education would obviously be greatly beneficial.

But the answer is more complex than a skills mismatch suggests. Rather, a big part of the problem is that it isn't always profitable to hire a new person. In-demand workers command higher pay, which affects whether a company will fill an open position. In other cases, productivity enhancements or offshoring might be alternatives to fill lower-skilled positions to keep costs down.

One issue can be observed within the commonality of occupations experiencing job growth. Look at where most of the jobs were created last month: retail, food service and health care. All require people to generate profits -- a software program can't perform venipuncture or serve fries. Nor can these jobs be offshored.

Now consider higher value-added jobs, grouping technology and finance along with mining and other services (these sectors aren't broken out separately in JOLTS) and we see there were 120,000 job openings in these categories at the end of September, but only 10,000 jobs in these sectors were actually filled in November. Corresponding with the research referred to above, these highly skilled jobs are the positions not being filled, accounting for much of the gap between job openings and jobs created. Employers will have to accede to higher pay demands for highly skilled workers. And it will take more time to fill these positions given the low unemployment rate for educated workers. Unfortunately, it will be nearly impossible to re-educate those with lesser skills anytime soon, and they will have to compete for the same jobs, which limits pay gains.

We may be shifting into a two-speed economy with a quasi-permanent, high unemployment rate and stagnant wages in lesser-skilled sectors, and booming employment sectors with pay gains for the most-educated workers and employers unable to fill all the openings. Highly skilled workers may continue to spend and see their incomes grow while those with less education may face continued high unemployment and lower wages. Simply witness the disparity of retailers' results, comparing the strong showings of luxury chains with those of midmarket outfits and discounters.

A two-speed economy presents a challenge to policymakers because it plays directly into the hot-button issue of income inequality. How that will be remedied is a significant challenge.